The modern financial and economic sphere knows a lot of cryptocurrencies besides Bitcoin. They are actively used to fulfill various plans, realize the necessary needs, and earn money. Such alternative cryptocurrencies have a generalized name — altcoins. What is the idea of these digital coins? What features are inherent in altcoins, and how did they appear? Are there any negative or positive qualities of alternative cryptocurrencies? You will find the answers to these questions in today’s article.
How Did Altcoins Appear?
The famous personality Satoshi Nakamoto, who made a revolution in the modern economy, introduced the Bitcoin cryptocurrency to the world community in 2008. This is not an innovative development and not the first virtual currency. However, the birth of Bitcoin has become the starting point for a successful era of cryptographic money. It was the BTC that induced the growth of popularity and, later, the demand for virtual currencies.
Nakamoto initially positioned Bitcoin as an alternative to fiat money. Many users were interested in such a well-advertised idea since the cost of cryptocurrencies and their circulation was not controlled, tracked, or regulated by anyone. The price of coins did not reflect the current state of the most important sectors of any country.
Behind Bitcoin, its analogs, generally called altcoins, began actively flooding the crypto market. Competent investment in these digital coins has already enriched many people, and skillful operations on cryptocurrency exchanges continue to increase users’ capital today.
What Are Altcoins?
The term “altcoin”, according to the accepted classification, means any cryptocurrency that appeared after Bitcoin. That is, 99.999% of all modern cryptocurrencies are altcoins. In fact, even Bitcoin forks (for example, Bitcoin Cash) are altcoins. Their number increases every month. Basically, all altcoins present on the crypto market have principles that are fully or partially similar to those involved in Bitcoin. However, the rules of their functioning are entirely different. This is their most crucial distinguishing quality.
Despite the similarity of the source code, each crypto is characterized by some unusual parameters or properties obtained due to small or major changes in the blockchain. For example, the length of the chain, the size of the blocks, and other competent modifications add a new feature to the altcoin.
Of course, the main part of digital currencies has a partially modified Bitcoin code, but there are altcoins with an almost innovative, unique encoding. These are a kind of altcoins of a new generation, for example, Ethereum, MIOTA, and Cardano.
Another exciting feature of altcoins is the simplicity of their creation. Anyone will be able to create their own alternative cryptocurrency. Specialized scripts and hashing algorithms will help in this.
Altcoins are developing faster and, in many ways, surpass Bitcoin. This can include the speed of development, partnerships, investment rounds, launches of funds and incentive programs for the community, community growth, and listings on exchanges. Bitcoin has worked out all these reasons for growth for a long time — it is traded on all crypto exchanges, and its community is growing.
Still, the Bitcoin community is a cryptocurrency community, and it does not grow at times in a short period. Altcoins have a different situation — their community increases rapidly.
This is a type of cryptocurrency, the price of which is pegged to another, less volatile asset. For example, fiat currency. The cost of stablecoins can also be associated with precious metals or other cryptocurrencies.
Here’s how it works: stablecoins have a reserve in a regular currency, for example, in US dollars. This money is used as collateral for issuing a certain number of cryptocurrencies. Therefore, the price of the latter depends on the dollar exchange rate.
The first stablecoin was Tether. Its transaction fee is less than when exchanging the US dollar. Therefore, it is often used by experienced crypto traders when trading crypto.
- Meme coins
These are altcoins, the creation of which was inspired by popular Internet memes. Unlike Bitcoin, the issue of which is limited, meme coins are released en masse. Their value depends more on community participation. They are usually bought by people who want to be in the trend. For example, Elon Musk has repeatedly posted on his Twitter about Dogecoin; a currency created as a joke. He also invested in it. The price of this meme coin may vary depending on certain actions of the billionaire.
- Utility tokens
Utility tokens are a category of altcoins that give users access to goods and services of a certain company in any particular blockchain network.
For example, Filecoin is a utility token used to buy space in the blockchain network of the same name for storing files. So the Filecoin network can be called a decentralized version of popular cloud storage platforms such as Google Drive.
- Governance tokens
Governance tokens are a type of useful token that provides certain advantages. For example, the opportunity to participate in voting related to the blockchain. One of the well-known governance tokens is MKR. Its owners can vote for a decision on the protocol of decentralized finance. This is how they maintain a stable price of the DAI stablecoin.
- Security tokens
This is a digital form of securities. That is, stocks, bonds, and so on can be tokenized, and they will turn into security tokens. But this is not the same as cryptocurrencies. Security tokens work on an existing blockchain rather than creating a new one. For example, ERC-20 tokens are compatible with the Ethereum cryptocurrency and can work on the blockchain of the same name. People who have security tokens receive dividends in the form of additional tokens.
A fork is the splitting of the blockchain into two or more chains. It appears when coders change the method of how the blockchain is built. There are two types of forks:
- Soft forks — when all network changes are fully compatible with the old network versions. The computers that provide the coin operation do not need software updates. So at any time, these network changes can be canceled.
- Hard forks are radical changes to the blockchain network that are incompatible with the old mining software. In other words, a new altcoin is being created that cannot work with the old version on the same network.
What Is Bitcoin Dominance?
Bitcoin dominance is the share of Bitcoin capitalization in the total capitalization of the crypto market. For example, at the time of writing, the total capitalization of cryptocurrencies is $869.38B. The capitalization of Bitcoin is $332,733,995,922. It is easy to calculate that the capitalization of Bitcoin is about 38% of the total market capitalization. These 38% are Bitcoin dominance.
The value of BTCDOM is often used to understand what season it is in the cryptocurrency market. Simply put, “Is it the altcoin season or not?”.
Altseason is a period when altcoins grow faster than Bitcoin. Significantly faster. So much so that the capital from Bitcoin begins to flow into the top 100 CoinMarketCap.
In fact, the whole of 2021 was the altseason. The dominance of Bitcoin since the beginning of May is below 50%. The main role in the “launch” of the altseason is played by the ETH/BTC pair. Ether and its dominance is another important value that an investor in altcoins should keep an eye on. Usually, the first indicators of future altseasons become noticeable when the ether breaks up in the ETH/BTC pair.
Here it is worth remembering a simple trader’s rule — the larger the time frame, the more stable and accurate the trend. For example, on the hourly chart, Ether may show growth relative to Bitcoin, but on the daily chart, it may be in a descending channel.
Altcoins: Pros & Cons
- The creators of altcoins are trying to eliminate the disadvantages of Bitcoin, so this is an improved version of the first cryptocurrency. For example, altcoins are easier to mine: mining requires much less energy if they work on a different algorithm than PoW, then mining requires much less energy. Transaction fees are also lower here.
- The functionality of each altcoin is different, which makes them unique. For example, Po.et created a platform where creative people and publishers work on their licensing. Dash processes transactions in seconds, and so on.
- There are more than 10,000 altcoins, so investors have plenty to choose from. Of course, their price may be different. Some cost less than $1. And if you want to buy Ethereum, you will have to pay about $1,200.
- The biggest disadvantage of altcoins is that they do not have enough influence. Bitcoin dominates the market. Ethereum is in second place after it. The remaining altcoins occupy less than 40%. This affects their cost.
- Some altcoins are created quickly and copy the source code of other coins. Unfortunately, such cryptocurrencies are not sufficiently developed. This means that not all altcoins can be decentralized. Instead, they will be controlled by their creators.
- Most altcoins are limited in use because not everywhere they are accepted as a payment, compared to Bitcoin.